History RePPPeated - How public private partnerships are failing

Public-Private Partnerships (PPPs) are increasingly being promoted as the solution to the shortfall in financing needed to achieve the Sustainable Development Goals (SDGs). Economic infrastructure, such as railways, roads, airports and ports, but also key services such as health, education, water and electricity are being delivered through PPPs in both the global north and south.

Although the involvement of the private sector in public service provision is not new, there is currently keen political interest in PPPs as an important way to leverage private finance. Donor governments and financial institutions, such as the World Bank Group (WBG) and other multilateral development banks (MDBs), have set up multiple initiatives to promote changes in national regulatory frameworks to allow for PPPs, as well as to provide advice and finance for PPP projects.

Since 2004 there has been a rapid growth in the amount of money invested in PPPs in the developing world. Although the trend has been volatile since 2012, efforts by MDBs to leverage private finance in both emerging and low-income economies have continued — for example, through the “Cascade” approach developed by the WBG, whereby the use of private finance is prioritised over public or concessional finance. This indicates a more determined push to reduce the risk so private investors come in.

Many projects have been procured as PPPs simply to circumvent budget constraints and to postpone the recording of fiscal costs. Some accounting practices allow governments to keep the cost of the project and its contingent liabilities “off balance sheet”. This ends up exposing public finances to excessive fiscal risks. Current austerity measures and orthodox policy prescriptions that encourage a low fiscal deficit also create a perverse incentive in favour of PPPs.

This report gives an in-depth, evidence-based analysis of the impact of 10 PPP projects that have taken place across four continents, in both developed and developing countries. These case studies build on research conducted by civil society experts in recent years and have been written by the people who often work with and around the communities affected by these projects.

Although we do not intend to generalise our conclusions in the vast and complex universe of PPPs, these 10 cases illustrate the most common problems encountered by PPPs. Therefore, they challenge the capacity of PPPs to deliver results in the public interest.

We found that:

All 10 projects came with a high cost for the public purse, an excessive level of risk for the public sector and, therefore, a heavy burden for citizens. For example, the Queen Mamohato Hospital in Lesotho has had significant adverse and unpredictable financial consequences on public funds. Latest figures suggest that in 2016 the private partner Tsepong’s ‘invoiced’ fees amount to two times the “affordability threshold” set by the Government and the WB at the outset of the PPP. Contributing factors to cost escalation include flawed indexation of the annual fee paid by the government to Tsepong (unitary fee) and poor forecasting. In Sweden, the total construction cost of Nya Karolinska Solna (NKS) hospital has rocketed — from €1.4 billion to €2.4 billion — and has been beset by technical failures. It is now known as the “most expensive hospital in the world”.

Every single PPP studied was riskier for the state than for the private companies involved, as the public sector was required to step in and assume the costs when things went wrong. A significant example is the case of Jakarta Water in Indonesia, where two PPP contracts resulted in significant losses for the public water utility, PAM Jaya. In 2011, it reported a financial loss of US$18 million. Estimates suggest that losses will eventually total US$2.4 billion if the cooperation agreement continues as planned until its expiry date in 2022.

Five of the 10 PPPs reviewed impacted negatively on the poor, and contributed to an increase in the divide between rich and poor. For instance, in the case of the Queen Mamohato Hospital in Lesotho, the increasing and inflexible cost of the PPP hospital compromised necessary investment in primary and secondary healthcare in rural areas where mortality rates are rising and where three-quarters of the population live. In Jakarta, the provision of water through private operators (Jakarta Water) resulted in a radical increase in monthly bills, which are unaffordable for many poor families. Residents often rely on groundwater from community wedge wells, or have to buy water in jerry cans, which can cost as much as half a person’s daily income.

Three of the PPPs resulted in serious social and environmental impacts. Poor planning and due diligence accounts for some of these. For example, on the Mundra coast in Gujarat, India, where a thermal power station project has taken place, there were serious social and environmental violations from the outset. Following flawed impact assessments, there has been a deterioration in water quality and fish populations; community health impacts are evident due to air emissions; access to fishing and drying sites has been blocked; forced displacement of fishermen has taken place. This has also impacted on the life of women. Girls in particular have also been pulled out of school to perform physical and domestic labour to survive. In Colombia, the PPP project designed to improve the navigability of the Magdalena River suffered from poor planning. Although the project never went into the construction phase — it collapsed due to the failure of the company to get the financing needed to implement it — the preliminary works carried out have already negatively affected the environment in and around the river.

Nine out of 10 of the projects lacked transparency and/or failed to consult with affected communities, and undermined democratic accountability. The failure to publish contract details does not chime well with the risks that the public sector is forced to take on. In the small Indian town of Khadwa, for example, where a PPP was launched to provide municipal water, it took four years to finally inform the population about what was happening. More than 10,000 households filed objections against the project within a period of 30 days. This was in a town where regular domestic water connections totalled 15,000. In Liberia, where the government outsourced its public pre-primary and primary schools, initially to Bridge International Academies Ltd (BIA), the process was not competitive, local communities were not properly consulted, and there was not full transparency.

All cases showed PPPs were complex to negotiate and implement, and that they required specific state capacities to negotiate in the public interest, including during the renegotiation process. In Peru, the renegotiation process to build a new airport through a PPP in Chinchero resulted in a change to the entire funding structure of the project. After a strong report from the Comptroller General referring to economic damages for the state, and in the midst of a national scandal over the project, the Peruvian government finally had to cancel the contract on the grounds of national interest. The construction of a courthouse in Paris proved so complex, costly and controversial that the new French Justice Minister has decided that her Ministry will never engage in a PPP again.

Three of the PPP contracts had to be cancelled due to an evident failure in the process, including proper due diligence to identify the possible impacts of the project. For example, the Castor Project — feted as Spain’s biggest offshore gas storage plant — was halted after gas injections caused more than 1,000 earthquakes. Despite never being used, the Castor project has so far cost the public €3.28 billion, which is currently set to be paid through increased gas bills.

This joint CSO report makes the following recommendations to the WBG, the International Monetary Fund (IMF) and other public development banks, together with the governments of wealthy countries that play a leading role in these institutions:

Halt the aggressive promotion and incentivising of PPPs for social and economic infrastructure financing, and publicly recognise the financial and other significant risks that PPPs entail.

Support countries in finding the best financing method for public services in social and economic infrastructure, which are responsible, transparent, environmentally and fiscally sustainable, and in line with their human rights obligations. Prioritise tax revenues, whilst augmenting them with long-term external, and domestic, concessional and non- concessional finance, where appropriate.

Ensure good and democratic governance is in place before pursuing large-scale infrastructure or service developments. This should be done through informed consultation and broad civil society participation and monitoring, including by local communities, trade unions, and other stakeholders. Uphold the right to free, prior and informed consent, and ensure the right to redress for any affected communities. The rights of affected communities should be taken into account.

Ensure that rigorous transparency standards apply, particularly with regard to accounting for public funds — the contract value of the PPP and its long-term fiscal implications must be included in national accounts. Contracts and performance reports of social and economic infrastructure projects should be proactively disclosed. The public interest ranks higher than commercial interests.

Finally, we urge all those concerned with justice, equality, sustainability and human rights to resist the encroachment of PPPs and to push instead for high-quality, publicly-funded, democratically-controlled, accountable public services. The wellbeing of our communities and societies depends on it.